Two decades ago, policymakers introduced Singapore’s first “anti-speculation measures” – a comprehensive package of curbs that analysts thought would surely bring the property market to a standstill.

But when the market did stall later, these more-stringent loan conditions and new taxes and regulations weren’t the reason for it; instead, it was an event that no one foresaw at the time – the 1997 Asian Financial Crisis.

As Asean currencies plunged and Singapore slipped into recession the following year, private home prices fell more than 40 per cent between 1996 and 1998. This prompted the government to quickly unwind and relax most of the anti-speculation measures.

An equivalent of such an external shock in today’s context would be an abrupt spike in interest rates, or the tanking of the US or Chinese economies, industry players said.

But those aren’t the kind of triggers the property sector is hoping for in order for the government to relax on the current lot of cooling measures.

Besides the absence of an external crisis, other factors are in force to make the current cycle of measures – which began in 2009 – more long-drawn than 1996’s.

The main one is the inertia of the market. It took eight rounds of cooling measures before any discernible impact registered on property prices, because home buyers still considered market conditions to be positive.

Global low interest rates, abundant liquidity and Singaporeans’ income growth continued to build a case for property investment, even speculation.

Whenever they imposed something, a bit of a slowdown would be seen. Then the market would rebound in its volume of transactions.

An industry watcher attributed that very much to liquidity due to quantitative easing, which caused a lot of liquidity to go around globally, as well as the strength of domestic and regional wealth, which sustained demand in spite of the cooling measures.

It took the Total Debt Servicing Ratio (TDSR) framework, “dropped like a bomb” in June 2013, to finish the job.

Coupled with the 15 per cent Additional Buyer’s Stamp Duty (ABSD) on foreigners’ property buys, and the paring down of the Mortgage Servicing Ratio (MSR) for HDB flat buyers to 30 per cent, this effectively doused the overheated market.

Asked why the TDSR has been especially effective, Lee Liat Yeang, senior partner at Dentons Rodyk & Davidson, replies that it is because the TDSR guidelines drill down to the smallest details and close off possible loopholes; the Monetary Authority of Singapore (MAS) took pains to standardise the way banks compute TDSR for mortgagors.

For computation purposes, the MAS has:

set interest rates at 3.5 per cent for home loans across the board;

required a 30 per cent haircut on variable income (that is, on commissions, bonuses, allowances);

allowed only certain liquid financial assets to be included as income streams;

clarified rules on the use of guarantors; and

barred proxies from coming in as mortgagors.

Mr Lee says: “The TDSR measure has forced the banks to comprehensively assess the real ability of the borrower to finance the property purchase in light of other financial commitments.

“At the same time as the imposition of the TDSR, the MAS also prevented people from using their less financially capable family members to purchase the property (to avoid the ABSD), and to support such purchases by either becoming the guarantor or the borrower. This also closed another gap in the earlier measures and worked with the TDSR to quell demand further.”

A property-industry veteran, who has been in the public and private spheres and in academia, but who declined to be named because he has since retired, says: “Prior to TDSR, various stakeholders had gotten more sophisticated in banding together to find ways to allow mortgagors to obtain more gearing from the banks. It artificially increased the demand . . . Now, with the guidelines, it gives banks not much avenue to come up with creative funding and financing instruments.”

He adds that another reason the 1996 measures were rolled back more quickly was that they were designed to meet a different objective from the current crop of measures.

“The 1996 measures tackled only property churn in the market. It taxed those who sold their properties within three years of purchase, which is really meant to prevent speculation. That’s why the first set of measures were called ‘anti-speculation measures’. They were aimed at weeding out people who were churning properties.

“This round, it is not just tackling speculation; it is also a fundamental reset. It’s a paradigm shift to align long-term property prices back to affordability, based on prudency rules set by the MAS.”

The impact that TDSR had on the market was immediate, and pronounced. Developers’ new home sales fell by a third, from 22,000 units in 2012 to 15,000 units a year later.

Private home prices changed direction, falling 0.9 per cent in the fourth quarter of 2013 from the previous quarter. But most critically, transaction volumes halved from about 14,800 units in the first half of 2013 to 7,900 units in the second half.

An analyst said that the fact that volumes came down after TDSR was implemented showed that many households were already substantially leveraged. If you were already 30-40 per cent leveraged, it leaves you very little headroom to go and buy another property.

The other big difference between 1996-1998 and 2009-2016 lies in the prevailing interest rates, says Mr Lee. “Interest rates went up to beyond 8 per cent in 1998 after the Asian Financial Crisis, and that crashed the market and made the government relax the measures.”

Today’s rates are still at historical lows. The decline in private home prices has been very gradual, compared to 1996-8, easing just 9.1 per cent over the past 10 quarters.

Given that the combination of TDSR and the ABSD on foreigners has proven to be the most potent in correcting the property market, could it be that they are the only measures needed to keep asset prices in check?

The consensus is that the TDSR framework is a good move to encourage financial prudence among borrowers and banks. Perhaps it is useless to fight it, since the MAS has made it clear that it will be a permanent fixture.

But there is less agreement on the need for the ABSD. The government believes that the market will rebound if it is removed, but many in the market would like to see it gone. They find it redundant for Singaporeans who are already curbed by TDSR. As for foreigners, some think it should stay to manage foreign hot money; others find it too punitive and say a different control can perhaps be implemented.

Adapted from: The Business Times, 22 June 2016

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